Question

Explain the concept of elasticity of demand, and provide examples of both elastic and inelastic goods. What determines elasticity for your examples?

Answer 1

Elasticity of demand = It refers to measurement of change in quantity demanded by consumer as the price of that good changes. Formula = ∆Q/∆P.

Example of elastic good -

Most common good of our day to day life, Fuel. When the price of Fuel increases then less and less people are willing to use car for the commutation means quantity demand for fuel has decreased. And we get to see less amount of cars on road. In same manner if price decrease more and more people are willing to use car for commutation.

Example of inelastic good -

Life saving drugs/medicines - changes in price of medicine have little to no effect on quantity demanded. If price increase it doesn't followed by decrease in quality demanded because it is very necessary for patient and one will not compromise with health. Similarly, if price decreases quantity demanded will not increases because no one buys these medicine unless they really need it

Factor determining elasticity of above examples -

In the case of fuel - generally people compare the advantages between taking public transport or private car. If fuel price increases then public transport become little bit attractive and people will take public transport.

In the case of medicine - medicine are not normal goods. Also people don't consume it until it is prescribed by doctors. Therefore, if that medicine is important for cure and prescribed by doctor people consume it irrespective of price. But if they don't need it people doesn't buy howmuch ever there is decrease in price.